Bitcoin Futures Fueling ‘Gut-Wrenching’ Declines, Tom Lee Says

Some of the recent “gut wrenching” weakness in Bitcoin, which dropped as much as 20 percent earlier this week, may be due to the expiration of futures linked to the cryptocurrency, according to Thomas Lee, head of research at Fundstrat Global Advisors.

Photographer: Chris Goodney/Bloomberg

Lee flags “significant volatility” around Cboe and CME futures expirations, even as sentiment and technical factors have also been “awful.” His report Thursday cites Justin Saslaw’s theory that Bitcoin seems to fall into expiration, and notes there have been six expirations since Cboe Bitcoin futures contracts launched, including one on June 13.

Bitcoin has fallen 18 percent on average in the 10 days preceding expiration, with price recoveries by the sixth day afterward, Lee wrote. If a trader is long Bitcoin and short the futures, as contracts move closer to expiry, holders may sell a large share of the coins at volume weighted average price (VWAP) to minimize tracking error. But near expiration, may sell the remaining Bitcoin, causing the price to drop, leaving the short position in the futures to close “with a handsome profit.”

At the same time, Lee writes, inflows into crypto have been insufficient, noting there’s more net supply this year amid initial coin offerings, mining rewards, and capital gains taxes, while absorption has been hampered by slow progress on creating institutional tools.